Hyderabad metro detailed project appraisal. Various facts and assumptions about costs, cash-flows and interest rates and valuation of the project using project finance concepts like Net Present Value (NPV), Internal Rate of Return (IRR), Weighted Average Cost of Capital (WACC) etc. Sensitivity and Scenario Analysis of the results.
Hyderabad metro detailed project appraisal. Various facts and assumptions about costs, cash-flows and interest rates and valuation of the project using project finance concepts like Net Present Value (NPV), Internal Rate of Return (IRR), Weighted Average Cost of Capital (WACC) etc. Sensitivity and Scenario Analysis of the results.
Hyderabad metro detailed project appraisal. Various facts and assumptions about costs, cash-flows and interest rates and valuation of the project using project finance concepts like Net Present Value (NPV), Internal Rate of Return (IRR), Weighted Average Cost of Capital (WACC) etc. Sensitivity and Scenario Analysis of the results.
Acknowledgement We would like to thank our professor Dr. Anupam Rastogi for giving us the opportunity to undertake the financial modelling of Hyderabad Metro and for providing us his esteemed guidance and the needed reference models
We would also like to thank all our classmates who helped us in understanding the subject through their valuable piece of advice.
Table of Contents Hyderabad Metro Rail Overview .............................................................................................................. 1 L&T Overview ...................................................................................................................................... 1 Project details...................................................................................................................................... 2 Salient Features of the Project ............................................................................................................. 2 Fare structure ...................................................................................................................................... 3 Advantages of the Project .................................................................................................................... 3 PPP structure of the Project..................................................................................................................... 4 Construction Schedule ......................................................................................................................... 4 Current status of the Project ................................................................................................................ 4 Bidding Process ....................................................................................................................................... 5 Initial Bidding ...................................................................................................................................... 5 Rebidding Process ............................................................................................................................... 6 Performance Guarantee agreement .................................................................................................... 7 Viability Gap Funding ........................................................................................................................... 7 Golden share ....................................................................................................................................... 7 Deal structure ...................................................................................................................................... 8 Project Financial Details: Assumptions ..................................................................................................... 9 Assumptions & Inputs used in the Financial Model .............................................................................. 9 Calculation of WACC .............................................................................................................................. 10 Estimation of Beta ............................................................................................................................. 10 Estimating the Average Lease Rental prices ....................................................................................... 11 Debt Schedule ....................................................................................................................................... 12 Incorporating the New Land Acquisition Policy into the financial model ................................................ 13 Compensation: .................................................................................................................................. 13 Concern due to land acquisition......................................................................................................... 13 Sensitivity Analysis ................................................................................................................................ 15 Revenue sensitivity ............................................................................................................................ 15 Cost sensitivity .................................................................................................................................. 16 Scenario Analysis ................................................................................................................................... 17 Risks involved in the project .................................................................................................................. 18 References ............................................................................................................................................ 19
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Hyderabad Metro Rail Overview Transportation in a metro city is a major issue for the Government of Andhra Pradesh, and Hyderabad is not an exception to this rule. Keeping this in view, the Hyderabad Metro Rail is undoubtedly one of the largest modern transport systems in the world based upon the PPP model. Forecasting the requirements of ensuring a well-modulated transport system, the Government of India has in its futuristic reform document focused upon a strategy that would promote fast- paced growth that would bring about equitable and sustainable improvements in the overall living standards of the citizens.
Hyderabad is a growing city that covers 625 square kilometres of municipal corporation area and 6,852 square kilometres of metropolitan area. It is a hub for Information Technology / Information Technology Enabled Services (IT/ITES), Biotech and Pharmaceutical sectors along with being a tourist attraction. The burgeoning population has put Hyderabads transportation system under immense pressure. The city requires a robust, dependable, comfortable, affordable and sustainable transportation system. Metros and MRTS (Mass Rapid Transport System) are emerging as a major area for infrastructure development in major cities with high population (around 8 Million). Thus, the Government of Andhra Pradesh (GoAP) has planned a Mass Rapid Transit system (MRTS) covering three high traffic density corridors of Hyderabad. The project is planned to be developed on a PPP basis through the Design Finance Build Operate Transfer (DBFOT) mode.
The main idea behind the concept of Metro Rail is to make sure commuters reach on time to work and not delayed on account of lack of rapid transport. Growing urbanizations has led to innumerable problems for commuters who are delayed on account of traffic jams. Metro Rail will allow them to bypass these traffic congestion barriers. The driving force for conceptualizing Metro Rail in Hyderabad is on account of a dire need for an eco-friendly, solid and quick transport that would withstand the growing demands of an urban city like Hyderabad which is on the way of becoming a popular global destination.
The Metro Rail Project, once completed will transform Hyderabad as the preferred city in India; with integrated urban transport planning using inter modal connectivity and convenient sky-walks, which will mark the beginning of an era of seamless commuting in India.
L&T Overview L&T Metro Rail (Hyderabad) Limited is a subsidiary of L&T Infrastructure Development Projects, an Infrastructure Development arm of L&T. L&T is one of the largest and most respected companies in the private sector, known for its project management and execution capabilities of large infrastructure projects in the domestic and international arena.
A strong customer-focused approach, the constant quest for top-class technology and quality, backed with a commitment to nation building have enabled L&T to attain and sustain a leadership position in its major lines of business over the past seven decades and become a premier institution in engineering and construction. (Ref: http://en.wikipedia.org/wiki/Hyderabad_Metro_Rail) Page | 2
Project details The Hyderabad Metro Rail Network will cover a total distance of around 72 Km across three corridors:
Corridor 1: Miyapur L.B.Nagar (29 Km) Corridor 2: Jubilee Bus Stand - Falaknuma (15 Km) Corridor 3: Nagole Shilparamam (28 Km)
The Project will be integrated with existing railway stations, suburban railway network (MMTS) and bus stations to ensure seamless and comfortable travel. There will be three depots, one for each Corridor, located at Miyapur, Falaknuma and Nagole. Corridors 1, 2 and 3 will be designed for peak hour peak distribution traffic (PHPDT) of 50,000, 35,000 and 50,000 respectively. The speed of the system would vary from 34 kmph to 80 kmph and the trains would have a frequency of 3 to 5 minutes. Salient Features of the Project It is an elevated metro rail, with two tracks (up and down lines) on a deck erected on pillars generally in the central median of the road, without obstructing the road traffic Stations are located at an average interval of 1KM elevated stations with passenger access through staircases, escalators and lifts Adequate parking space and circulating areas are being provided for multi modal integration at the stations Page | 3
With a frequency of 3 to 5 minutes during peak hours, the system is expected to carry about 17 lakh passengers per day by 2017 and 22 lakh by 2024 With a maximum speed of 80 kmph, the average speed of the trains will be 34 kmph an international standard for MRT systems Travel time on account of Metro will be reduced as below:
Using Bus Using Metro Rail Corridor I (Miyapur-L.B.Nagar 29 Kms) 1 hr 50 minutes 45 minutes Corridor II (Jubilee Bus Station-Falaknuma -15 Kms) 1 hr 10 minutes 22 minutes Corridor III (Nagole-Shilparmam- 27 Kms) 1 hr 30 minutes 39 minutes
Fare structure Distance (km) Metro Fare ( ) 0 2 09.00 2 6 10.00 6 10 12.00 10 14 14.00 12 15 16.00 15 18 17.00 > 18 19.00 Advantages of the Project Low energy consumption 20% per passenger km in comparison to road-based system Greater traffic capacity carries as much traffic as 7 lanes of bus traffic or 24 lanes of car traffic (either way) Very low ground space occupation 2 metres width only for elevated rail Hi-capacity carriers very high volumes of peak hour peak direction trips Eco-friendly causes no air pollution, much lesser sound pollution
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PPP structure of the Project Hyderabad Metro Rail Ltd, a fully owned Public Sector Undertaking of GoAP is currently implementing the Hyderabad Metro Rail Project.
Developed under a concession agreement on DBFOT basis for a period of 35 years, including a construction period of 5 years
Under the concession agreement, the operator has to design, finance, construct, operate, and maintain the 3 corridors and transfer the assets at the end of the concession period.
The assets of the project include the viaduct, stations, bridges, depots, rolling stock, signaling system, traction systems, communications systems, track work, fare collection system, etc.
The assets would be constructed or procured through contractors and equipment suppliers.
In addition, the operator would also have access to the commercial development of land available at the depots (212 acres) and 10% of the carpet area of the station sites identified in the concession agreement. This aggregates to a cumulative maximum of 12.5 million square feet in the case of depots and a cumulative maximum of 6 million square feet in the case of stations.
The SPV would also be allowed to undertake real estate development over the parking and circulation areas at stations.
All the real estate development related assets created under the project would also be considered the assets of the SPV which would be handed over to the Government at the end of the concession period of 35 years. Construction Schedule Stage Target section Distance (km) Corridor Stage I Nagole to Mettuguda 8 Corridor III Stage II Miyapur to Ameerpet 11 Corridor I Stage III Mettuguda to Ameerpet 10 Corridor III Stage IV Ameerpet to Shilparamam 9.51 Corridor III Stage V Ameerpet to L.B.Nagar 17.87 Corridor I Stage VI JBS to Faluknama 14.78 Corridor II Current status of the Project As of August 2013 end The Construction on line 3 is 50% completed and on line -1 Construction of pillars kicked-off in full swing. The construction of the entire 71.16 km has been split into 6 stages with the first stage scheduled to be completed by June 2014 with the entire project scheduled to be completed by July 2017 Page | 5
Bidding Process Initial Bidding The project was approved by the GoAP and global bids were invited through an Expression of Interest- cum-Request for Qualification (EoI-cum-RFQ) in November 2005. The EOI-cum-RFQ had stringent technical and financial criteria. The following seven consortia submitted their EOI along with their bids for pre-qualification. Essar Constructions (Mumbai), Srei (Kolkata), SembCorp, STE (Singapore) and Singapore MRT; Magna Allmore (Malaysia), Siemens AG (Germany), ETA (Dubai) and NCC (Hyderabad); Reliance Energy (Mumbai) and Bombardier (Canada); Metrail (Switzerland), Macquarie Bank (Australia) and MMC (Malaysia); GVK (Hyderabad), Gammon India (Mumbai), Alstom (France) and IDFC; Maytas (Hyderabad), Navabharat (Hyderabad), ItalThai (ITD-Thailand) ITD cem (Delhi); and IVRCL (Hyderabad), Hitachi (Japan) and BHEL.
Five of these consortia were pre-qualified by the GoAP, with the Metrail and ITD Cem consortia not qualifying. The Government of India considered the project for financial assistance under the VGF scheme and then allowed the GoAP to proceed with the RFP Process. The RFP document, including the model concession agreement, manual of specifications and standards as well as the state support agreement, was issued to all the pre-qualified bidders in May 2007 Consortia Bid Terms Maytas (Hyderabad), Navabharat (Hyderabad), ItalThai (ITD-Thailand) Pay Rs 30,311crores to the government concession period 35 years Magna Allmore (Malaysia), Siemens AG (Germany), ETA (Dubai) and NCC (Hyderabad) Pay Rs 250 crores to the government Reliance Energy (Mumbai) and Bombardier (Canada) Sought VGF grant of Rs 2,811 crore Essar Constructions (Mumbai), Srei (Kolkata), SembCorp, STE (Singapore) and Singapore MRT Sought a grant of Rs 3,100 crore GVK (Hyderabad), Gammon India (Mumbai), Alstom (France) and IDFC No bid submitted
During the concession period of, while the agreed to pay Rs 250 crore to the government. The two other bidders--Reliance sought a VGF grant of Rs 2,811 crore from the government and Essar sought a grant of Rs 3,100 crore respectively. The GVKled consortium did not submit a financial bid. Based on these bids, the Maytas consortium was awarded project. The Maytas-led consortium agreed to pay Rs 30,311crs to the government during the concession period of 35 years, while the Magna Allmore led consortium agreed to pay Rs 250 crs to the government.
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Sector PPP Project Structure State and Year PPP Contract Signed Government / Public Sector Entity / Entities Private Sector Promoter / Sponsor / Consortium Members Project Cost Concessi on Period Urban Infrastructure Mass Rapid Transport DBFOT Andhra Pradesh 2008 (Subsequently cancelled in 2009) GoAP Maytas Infrastructure, GoAP, Nav Bharat Ventures, IL&FS and Ital-Thai Rs. 11,814 crore 35 years
The project was to achieve financial closure by March 17, 2009. Major milestones achieved in the development phase are presented below: The SPV was incorporated in September 2008. Signing of the Concession Agreement and Shareholders agreement took place on September 18, 2008. Extension granted for financial closure and performance guarantee on March 17, 2009. The Concession Agreement with Maytas Metro was eventually cancelled on July 7, 2009 due to the failure of MML in arranging the Performance Security and achieving financial closure for the project Due to the large differences between the bids submitted by each of the consortia the GoAP took the decision to re-bid the project. Rebidding Process The RFQ for the new process was released on July 16, 2009 and the date for the submission of the RFQ was January 16, 2010. 8 bidders qualified for the RFP process and were asked to submit financial bids for the project. The bidders were as follows: Larsen & Toubro Ltd; Lanco Infratech-OHL Concesiones SL consortium; Reliance Infrastructure-Reliance Infocomm consortium; Essar-Leighton-Gayatri-VNR consortium; GVK-Samsung C&T Corporation consortium; GMR Infrastructure Ltd; Transstroy-OJSC Transstroy-CR 18G-BEML consortium; & Soma-Strabag AG (Austria) consortium
In the fresh bidding process, L&T bagged the deal. It has bagged the project amidst stiff competition seeking least viability gap funding of Rs. 1,458 crore. The Hyderabad project achieved financial closure in record six months despite a tough business environment. A consortium of 10 banks, led by the State Bank of India, sanctioned the entire debt requirement for the project. The equity component of the project will be infused by the L&T group. The project has a viability gap fund support from the Centre and the State.
The State Government has provided 269 acres of land, which includes space for two major terminal points and depots. It has also decided to pitch in with about Rs 2,000 crore for related infrastructure. Page | 7
The metro project will include around 18.5 million sq ft of transit-oriented development. As per projections, the project is expected to trigger robust economic activity. Of the 269 acres allocated, 57 acres and 18.5 million sq. ft. of built-up space are available for commercial exploitation. The project could enjoy lease rentals for 30 years, extendable by another 30 years, after which it would have to be handed over to the government.
Sector PPP Project Structure State and Year PPP Contract Signed Government / Public Sector Entity / Entities Private Sector Promoter / Sponsor / Consortium Members Project Cost Concessi on Period Urban Infrastructure Mass Rapid Transport DBFOT Andhra Pradesh, 2010 Government of Andhra Pradesh L&T Ltd
Rs. 14132 crore 35 years
Performance Guarantee agreement L&T Metro Rail (Hyderabad) Limited has already submitted a Performance Guarantee for Rs.360 crore to GoAP underlying its clear intent to execute the prestigious project in the stipulated time frame. As per the Provisions of Concession Agreement, construction will have to be completed in 5 years. Viability Gap Funding VGF is typically provided in competitively bid projects. Under VGF, the Central government meets up to 20 per cent of capital cost of a project being implemented in public private partnership (PPP) mode by a Central Ministry, State government, statutory entity or a local body. The State government, sponsoring ministry or the project authority can pitch in with another 20 per cent of the project cost to make the projects even more attractive for the investors. The India Government on May 6, 2013, approved final approval for viability gap funding of Rs. 1,458 crore (12.35 percent of Total Project Cost of Rs. 11,814 crore) under the Viability Gap Funding Scheme to the project from Government of Andhra Pradesh for development of Hyderabad Metro Rail on DBFOT basis. Golden share L&TMRHL handed over a special Golden Share of the company to the Andhra Pradesh Chief Secretary, Mr Pankaj Dwivedi. Golden Share is a non-transferable special equity share with a face value of Rs. 10 but gives powers to the State as if the Government holds 26 per cent shares in the SPV, without investing that amount. The Golden Share entitles the Government to nominate one director on the board of L&TMRHL and he will have veto powers on important matters as per the concession agreement. Thus, it ensures that the Government has a say in all major decisions taken by the private concessionaire company. It also ensures that the Governments rights are irrevocable and are not adversely affected in any manner. Some of the special powers that accrue to the Government due to Golden Share include power to veto, to purchase the companys own shares, and reduce the companys Page | 8
share capital among others. As per the Indian Companies Act, only those shareholders who have more than 26 per cent of the equity share capital have the right to block resolutions in board meetings and these powers accrue to the Government with the Golden Share. (Ref: http://www.thehindubusinessline.com/companies/lt-metro-rail-hands-over-golden-share-to- andhra-pradesh-govt/article2882253.ece)
Deal structure
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Project Financial Details: Assumptions The nature of the project is such that to maintain the lower cost of travel for passengers, the revenue Mix of the project when fully Operational is made up of: Ridership Revenue- 55 % Advertising revenue - 5% Leasing Revenue 40% Assumptions & Inputs used in the Financial Model
Average riders per day(FY15-16) 421500 Average riders per day(FY18 onwards) 1500000 Average WPI inflation 7% Average fare Increae(50% of inflation) 9% Average ridership increase/year till 2025 6.00% Lease Occupany in the 1st Year 5% Lease Occupancy in the 2nd Year 15% Lease Occupancy in the 3rd Year 30% Lease Occupancy in the 4th Year 100% Lease Occupancy in the 5th Year 100% Lease Occupancy from the 6th Year 100% Increase in Rental till 2020 6% Increase in Rental after 2020 4% Increase in Operating Expense/Year 5% Operating & Maintenance Expense(2017) 240.00 Operating & Maintenance Expense(2021) 407.00 Operating & Maintenance Expense(2031) 821.00 Operating & Maintenance Expense(2041) 1521.00 Depreciation SLM Annual Operating Expense(Source: DMRC)(In Rs crs) 90 Avg Rate of Interest(Base Rate(SBI)+225 basis points) 11.00% Initial Fare for Metro 12 SBI Base rate Assumption (historic average) 8.75% Area available for Lease(Sqft) 18500000
The following assumptions/inputs were used in the construction of the model Ref: 1. http://businesstoday.intoday.in/story/hyderabad-metro-revenue-nvp-reddy/1/191778.html 2 http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india.aspx
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Calculation of WACC Estimation of Beta As 40 % of revenues is from leasing of commercial spaces, and 60 % or revenues is estimated for passenger fares. We have taken two set of proxy companies: Real Estate companies involved in Commercial leasing and Infrastructure companies involved in Large infrastructure projects We have calculated the average unlevered Beta of both the set of companies and then calculated the unlevered Beta for the SPV based on the proportion of revenue contribution. We have then re-levered the beta of the SPV to reflect the Debt/Equity structure of the project.
0.85 Fig: Companies involved in large scale Infrastructure projects (source: www.moneycontrol.com)
Hence the Beta of the Project/SPV was: Unlevered Beta of Project Levered Beta 1.082 1.98
The Calculation for WACC was done as follows: Page | 11
Particulars % Amount(In Rs. Crores) Debt 70% 11478 Equity 21% 3440 Viability Gap Funding 9% 1458 Total 16376
Riskfree Rate(Bond Yield of Indian Bonds) 9.00% Market Risk Premium(Damodaran) 6.50% Equity Beta 1.98 Interest Rate 11.00%
Ke(Cost of Equity) 21.86% Kd(Post tax cost of debt) 7.37% Tax Rate 30.00% WACC 10.96%
Estimating the Average Lease Rental prices The lease rental prices per sq.ft was calculated on the basis of average rate/month/sqft in three areas where the stations would be located . Locality Area(sq ft) Lease rental Ameerpet 9000 270000 Panjagutta 3500 420000 Gachibowli 28000 1037000 Average 40
This is the current rate prevalent in the Hyderabad real-estate market .Based on the assumptions of 6% annual increment in Lease rentals, in FY15 the lease rentals were calculated as Rs. 46/month/sq.ft. (Ref: http://rentals.sulekha.com/search?rental=1&primarytag=commercial-showrooms- shops&city=hyderabad&locality=madhapur&pricetype=lakhs&)
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Debt Schedule The SPV has achieved financial closure for the project in 2011.The details of the financing are as follows:
No. of Participating banks 10 nos. Tenure 15 Years
The total Debt approved for the project is Rs 11478 cr. The debt is assumed to have a moratorium period of 3 years. The start date for Tenure of the loan is assumed to be in FY12.There is also the DSCR support fund of around 500 cr. to cushion the DSCR in the initial years of the commencement of operation. The Debt Schedule for the project is as follows:
How will the concessionaire manage the DSCR of less than 1 in the 1 st three years?
As seen in the above table, initial 3 years, the DSCR is below one. It is advised that L&T uses its equity/ Viability Gap fund or bring its own funds to pay the interest part during these 3 years and then the revenues should be adequate to service debt. L&T has been reported to list L&T IDPL, the concessionaire on Singapore stock exchange and raise money which can be used in the initial debt coverage.
Incorporating the New Land Acquisition Policy into the financial model Compensation: 1. Market value of the land: a) the minimum land value, b) the average of the sale price for similar type of land whichever is higher:
2. Value of the assets attached to land: Building/Trees/Wells/Crop etc as valued by relevant govt. authority;
Total compensation = 1) + 2)
3. Solatium: 100% of total compensation. This is to ameliorate the pain of forcible acquisition.
Retrospective operation: Bill applies retrospectively to cases where no land acquisition award has been made. Also in cases where the land was acquired five years ago but no compensation has been paid or no possession has taken place then the land acquisition process will be started afresh in accordance with the provisions of this act.
Land acquisition being a major cause of concern for the Andhra Pradesh government, about Rs.2000 crores has been set aside for expenses associated with acquisition of 269 acres of land that would be needed for the completion of the project. In this regard, the government has been successful in acquiring large portions of land at critical points. However, the major concern at the moment is with regards to acquiring properties along some busy commercial roads, with many establishments likely to be effected in the process. This is a cause of grave concern to the government, more than for the developer, as the progress of the project would be jeopardised if this issue is not resolved adequately. The project was effectively delayed by 4 months due to problems in securing land for development.
Concern due to land acquisition In the busy corridor that heads towards the IT hub of Hyderabad, land acquisition in the Ameerpet stretch and in the corridor passing through the Old City that touches the busy market junction of Sultan Bazar, have been troublesome. The local traders are against the project. To add to these issues, there are a few religious structures, including an Iskcon temple, which need to be acquired.
Members of the Secunderabad unit of International Society for Krishna Consciousness (Iskcon) have decided to launch a protest movement against the proposal to acquire 1,600 square yards of the temple land.
With metro barricades being erected at more busy junctions for construction of piers, restricting pathways, the traffic movement, too, has been adversely affected. The monsoon has further added to the commuters woes. However, no escape route from these problems is likely to emerge for the next two years.
Estimates to calculate cost due to the land acquisition bill Page | 14
Total Land acquired 269 acres
Population density of Hyderabad 18480 per Km 2
1 Km2 247.11 acres
Total Populationaffected by Metro 20117.03 Average number of Persons per household 4
Number of House Hold Affected 5029.26
Minimum Compensation To be borne by Concessionaire
Subsistence Allowance 36000 for the first year
Livelihood compensation 24000 per year for 20 years
Transporaton allowance 50000 for the first year
Upfront Resettlement allowance 50000 for the first year
Also, if the land is acquired for urbanization,
20% of the developed land will be reserved subsequent development and offered to land owning families, in proportion to their land acquired and at a price equal to cost of acquisition plus cost of subsequent development (This will have no impact on revenue of project)
As the land is being acquired by GHMC , the increase cost of land acquistion will be borne by GHMC and not the SPV and hence will not affect the cost of the project
So, the following cost estimates should be taken as contingency provisions year 1: 80.47 crore; year 2 to 20: 12 crore. No bill Impact due to the bill NPV 2024.00 1917.00 Project IRR 13.03% 12.91% Equity IRR 11.83% 11.82% AVG DSCR 1.31 1.12
Sensitivity Analysis Revenue sensitivity Major inputs to the revenue estimation are: i. Average ridership per day initially ii. The subsequent growth rate of the ridership iii. Occupancy rate of the space available for lease iv. Growth in the lease rentals
As can be seen from the analysis above, the most uncertain and thus sensitive parameter among the revenue estimate inputs is the Lease Occupancy. This has a high probability of missing estimates and if it does, it impacts the revenues and thus the IRR, NPV and DSCR ratios significantly. Cost sensitivity The inputs to the cost sensitivity estimation are: i. The operating and maintenance cost estimate ii. Interest rate (SBI base rate + 225 basis points)
Escalation in annual operating & maintenance expenses
Average SBI base rate during the loan tenure 8.75% 9.25% 9.75% 10.25% NPV 2024.00 4063.10 3658.29 3274.31 Project IRR 13.03% 13.03% 13.03% 13.03% Equity IRR 11.83% 11.83% 11.83% 11.83% AVE DSCR 1.31 1.28 1.24 1.21
As seen from the analysis, adverse movements in both the inputs affect the project performance but the most uncertain input here is the interest rate. As it is a floating rate loan, it is exposed to interest rate risk. For instance a 1% rate hike by RBI and a subsequent hike by SBI will erode approximately 800 crore of the project NPV
Scenario Analysis While the sensitivity analysis contained the effect of change in one input when the others are kept constant, scenario analysis is more dynamic. There are three cases taken: 1. Optimistic case 2. Base case 3. Pessimistic case Optimistic Base Case Pessimistic NPV 3653.903 735 -2453 Project IRR 0.139883 11.74% 7.61% Equity IRR 12.75% 9.89% 3.75% Avg DSCR 1.49 1.28 0.65 Assumptions Initial rider-ship per day 1700000 1500000 1200000 Ridership growth/year 7% 6% 4% Lease occupancy 100% 80% 50% SBI average base rate 8% 8.75% 10.50% Contents
The optimistic case is relatively comfortable in the sense that it has sufficient IRR cushion and a comfortable DSCR of 1.5 on an average
The base case just manages to be on the borderline. If any of the risk factors changes adversely, the base case would be under stress
The pessimistc case suffers unfavourable numbers in all categories and is the least desirable
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Risks involved in the project 1. Price risk is minimal as the Fare structure is pre-determined at a given growth rate (5% + 50% of WPI inflation) 2. Demand risk is the biggest risk; i. If the ridership of the Metro misses the estimate of 15 lakhs per day initially and 25 lakhs in 10 years, the project IRR and NPVs are significantly impacted as seen in the sensitivity analysis ii. The lease space demand is the most uncertain estimate and perhaps the biggest risk; (Enter as many pre-contracts as possible) 3. New land acquisition bill: The new land acquisition bill which is going to be enacted from 2014, can delay the project significantly due to the Rehabilitation and Resettlement clause. Any delays would add up the interest cost. All the land should be attempted for acquisition as soon as possible to reduce this risk. 4. Bifurcation of the Andhra Pradesh state is expected to reduce the population growth in the long run and thus the rider-ship growth estimates go off the expectations. (Ref: http://www.railnews.co.in/?p=12819)